MODULE : INV2601
,INV2601 Exam
Revision Notes
Contains:
✓ Exam Revision Notes
,TUTORIAL 1: INTRODUCTION, STUDY UNIT 1 & 2
STUDY UNIT 1: THE INVESTMENT SETTING
- The required rate of return.
- This is the compensation of the payment the investor is willing to accept
for the money he/she invests:
- The investor takes the following into account; time value of money/time
period of the investment, the inflation rate as well as the risk involved.
- How to calculate:
o Nominal and real rates
o NRFR = [( 1+RRFR)(1+EI)-1] x 100
o So basically the nominal rate is the real rate which takes inflation into
account. Please look in your textbook pg 4 for a good example on this
calculation.
o You may use the same formula to calculate RRFR by making the RRFR
the subject of the formula.
o HPY and HPR
o HPR = Ending value of the Investment/ Beginning Value of the investment
o So basically if you get back more then you put in you will have made a
profit resulting in an HPR greater then 1.
o HPY = HPR -1
o This is basically obtaining the return in percentage for to compare few
investments
o Annual HPR = (Ending value of the Investment/ Beginning Value of the
investment)1/n
o N being the number of years, please look at a good example on pg 7 of
the textbook.
o Expected return, standard deviation and coefficient variation
o Expected Return = The sum of: probability x return
o Standard deviation is a measure of risk, how far away from the average
will the return go, so the further away the more risky your asset hence the
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, INV2601
higher the Standard Deviation.
o it is a detailed calculation which you will find on Pg 8-9.
o Although being detailed the sums are very simple and the method just has
to be memorised.
o CV = Standard Deviation/Expected Return
o This measure is used when comparing assets, is is a better relative value.
- Diversification.
- Have you ever heard of the saying “ don’t put all your eggs in one basket, that’s
exactly what Diversifcation is. To invest in a group of assets which don’t all folloe
the same pattern of returns, in that way when one is doing bad the others will be
doing good.
- You can diversify by taking different asset classes into account, please read
through these classes on Pg 11-15 of your textbook.
- STUDY UNIT 2: ORGANISATION AND FUNCTIONING OF SECURITIES
MARKETS
- The market:
- To summerise; a well functioning market has accurate and timeously information
available, it is liquid meaning assets can be bought or sold quickly at similar
prices, transactions costs are low and the market reacts quickly to new
information such as politics ect.
- Primary markets are where new assets are sold and Secondary markets are
where previously owned assets are sold.
- Types of market transactions.
- Market order, short sales and margin transactions.
Page 18
,INV2601 Exam
Revision Notes
Contains:
✓ Exam Revision Notes
,TUTORIAL 1: INTRODUCTION, STUDY UNIT 1 & 2
STUDY UNIT 1: THE INVESTMENT SETTING
- The required rate of return.
- This is the compensation of the payment the investor is willing to accept
for the money he/she invests:
- The investor takes the following into account; time value of money/time
period of the investment, the inflation rate as well as the risk involved.
- How to calculate:
o Nominal and real rates
o NRFR = [( 1+RRFR)(1+EI)-1] x 100
o So basically the nominal rate is the real rate which takes inflation into
account. Please look in your textbook pg 4 for a good example on this
calculation.
o You may use the same formula to calculate RRFR by making the RRFR
the subject of the formula.
o HPY and HPR
o HPR = Ending value of the Investment/ Beginning Value of the investment
o So basically if you get back more then you put in you will have made a
profit resulting in an HPR greater then 1.
o HPY = HPR -1
o This is basically obtaining the return in percentage for to compare few
investments
o Annual HPR = (Ending value of the Investment/ Beginning Value of the
investment)1/n
o N being the number of years, please look at a good example on pg 7 of
the textbook.
o Expected return, standard deviation and coefficient variation
o Expected Return = The sum of: probability x return
o Standard deviation is a measure of risk, how far away from the average
will the return go, so the further away the more risky your asset hence the
Page 17
, INV2601
higher the Standard Deviation.
o it is a detailed calculation which you will find on Pg 8-9.
o Although being detailed the sums are very simple and the method just has
to be memorised.
o CV = Standard Deviation/Expected Return
o This measure is used when comparing assets, is is a better relative value.
- Diversification.
- Have you ever heard of the saying “ don’t put all your eggs in one basket, that’s
exactly what Diversifcation is. To invest in a group of assets which don’t all folloe
the same pattern of returns, in that way when one is doing bad the others will be
doing good.
- You can diversify by taking different asset classes into account, please read
through these classes on Pg 11-15 of your textbook.
- STUDY UNIT 2: ORGANISATION AND FUNCTIONING OF SECURITIES
MARKETS
- The market:
- To summerise; a well functioning market has accurate and timeously information
available, it is liquid meaning assets can be bought or sold quickly at similar
prices, transactions costs are low and the market reacts quickly to new
information such as politics ect.
- Primary markets are where new assets are sold and Secondary markets are
where previously owned assets are sold.
- Types of market transactions.
- Market order, short sales and margin transactions.
Page 18
